Australian, New Zealand dollars wrongfooted by US dollar rally, bonds fare better

THE Australian and New Zealand dollars were licking their wounds on Wednesday after a sharp rally in the U.S. dollar wrongfooted the market, while bond benefited from more signs of a cooling in global inflation.

The whiplash move left the Aussie at US$0.6739, having been as high as $0.6834 at one stage on Tuesday. Support comes in at US$0.6690 and US$0.6629, with major resistance still around the 200-day moving average of US$0.6852. The kiwi dollar recoiled to US$0.6259, from a top of US$0.6361 on Tuesday. It also briefly broke support at US$0.6231 to hit its lowest in five weeks at US$0.6201. The retreat was partly sparked by a surprisingly low reading for German inflation which slugged the euro and caught speculators badly short of US dollars. Adding to the pressure were concerns about Chinese demand for commodities as a rush of coronavirus cases hits factories and mobility, though analysts see the reopening as positive for growth in the long run. Still, the slowdown in German inflation was a boon to local bond markets, which also benefited from a sharp fall in oil prices and in shipping costs, with the Baltic Dry index suffering its largest daily drop on record. That helped Australian 10-year yields drop around 10 basis points to 3.94 per cent and reverse much of last week’s spike. “Inflation is finally falling and we envisage further sharp declines in almost all economies during 2023,” analysts at Capital Economics wrote in a note. “A large part of the fall will be down to energy and food effects.”

“In most cases, this disinflation will be more dramatic than either the consensus of economists or central banks predict...allowing central banks to end or even start to reverse their policy tightening.”

Swaps market pricing still favours the Reserve Bank of Australia (RBA) hiking by a quarter point to 3.35 per cent in February, though futures are leaning toward no move. That could change next week with the release of data on November retail sales and the monthly consumer price index. The October CPI surprised on the downside and analysts are unsure what to expect from this relatively new series. REUTERS